The German Federal Labor Court (Bundesarbeitsgericht – BAG) has issued two new decisions impacting virtual stock option plans (VSOPs).  In a March 19, 2025 decision (BAG, March 19, 2025 – 10 AZR 67/24), BAG ruled that virtual stock options (“phantom shares”) are not speculative options/opportunities, but rather part of the remuneration already earned and, therefore, forfeiture clauses in VSOPs are invalid.  The new decision is a reversal of the court’s prior position on these virtual shares.  In the other new decision, issued on March 27, 2025 (BAG, March 27, 2025 – 8 AZR 63/24), BAG ruled that phantom shares exercised while an employee is still employed have to be considered when calculating the compensation owed for the employee’s compliance with a post-contractual non-compete covenant.  Below is an overview of the new cases and steps employers can take to ensure their plans are in compliance.

No Forfeiture of Phantom Shares

In 2008, BAG first considered whether share options or contractual replicas of share options (virtual options) promised by the employer to the employee in a standard form provision could be linked to the existence of the employment relationship.  In that case, the court considered two employee participation programs: under one program, the exercise right forfeited if either party declared a notice of termination, even though the employment relationship continued to the end of the notice period; the other program stipulated that the employee’s subscription right forfeited without replacement upon termination of the employment relationship.  BAG considered the key question of whether the programs had the character of remuneration and whether this precluded forfeiture, given the general principle that employees may not be deprived of wages that have already been earned.  BAG ruled that “leaver clauses” in the context of an employee participation program would not deprive the employee of remuneration already earned, but only of an earning opportunity, and therefore both programs were lawful.  

Now, in its March 19, 2025 ruling, BAG has taken a different view and expressly abandoned the previous case law.  In the new decision, BAG found that provisions requiring forfeiture of vested options after termination of the employment relationship are incompatible with the legal concept of the employment relationship as an exchange relationship (that is, work in exchange for wages), and therefore such forfeiture constitutes an unreasonable disadvantage for the employee and a disproportionate aggravation of termination because the employee is threatened with a loss of assets in the event of termination.  BAG also disapproved of a provision that provided for the successive forfeiture of options after termination of the employment relationship, criticizing the fact that the options would expire twice as quickly as they had previously vested and there was no opposing employer interest that could justify the shorter forfeiture period.

Phantom Shares and Post-Contractual Non-Compete Covenants

The other new BAG decision addresses whether payments from VSOPs affect the minimum compensation required for compliance with a post-contractual non-compete covenant. In Germany, post-contractual non-compete covenants are binding only if the employer pays the employee compensation for the duration of the non-compete period that amounts at least to half of the contractual benefits last received by the employee (the so-called waiting allowance).

BAG ruled that only payments for phantom shares that were exercised during the existing employment relationship constitute consideration for the work performed by the employee in the employment relationship.  However, payments received for phantom shares exercised after the termination of the employment relationship are not consideration and therefore do not count towards the minimum compensation.  BAG also stated that to calculate the waiting allowance, either the average of the benefits from the VSOP over the last three years must be considered or, if the VSOP has not existed for that long, the benefits received during its existence.

Employer Action Steps

As a result of these new rulings, companies with (virtual) employee participation programs for employees in Germany should review their provisions.  Because prior case law had approved forfeiture clauses, there will be a considerable need for adjustment in practice.  Also, since it is now clear that such virtual programs can increase the costs of the waiting allowance, companies should carefully consider whether they want to offer, or continue to offer, these programs.

A possible alternative structuring option may be available within a company group.  If a foreign group parent company that is not the contractual employer sets up the virtual participation program and allows the employee to participate (regardless of the employee’s contractual employer), there is an argument that the virtual options do not constitute remuneration.  In particular, as recently as 2022, BAG took this view when it rejected the inclusion of stock options and restricted stock units granted by the U.S. group parent company in the calculation of the waiting allowance.  To reduce the risk of legal action in Germany with such an arrangement, the parties can specify foreign law and jurisdiction for the employee participation program via choice of law and forum clauses.